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US Treasury department seeks to revamp Obama-era regulations

Treasury secretary Steven Mnuchin has responded to Donald Trump’s call for a regulatory break for US banks, announcing a slew of recommendations designed to overhaul a regime that aides say has been “disastrous” for the world’s largest economy.

Some of the recommendations contained within a 147-page report, released on Monday evening, will require the support of Congress — which could be difficult, given hardened Democratic opposition in the Senate and a tight legislative agenda.

But many of Mr Mnuchin’s proposals can be implemented by a new suite of regulators at the top agencies. Mr Trump has already nominated a bank-friendly allyof Mr Mnuchin’s to run the Office of the Comptroller of the Currency, and new supervisory heads should be installed before long at the Federal Reserve and the Federal Deposit Insurance Corporation.

Shares in the big banks such as Goldman Sachs and Morgan Stanley moved higher on Tuesday morning, fanned by hopes that they will benefit from lighter capital and liquidity standards and gentler supervision under the new regime. Critics of the Obama-era regulatory framework have argued it went much too far in its efforts to rein in the biggest banks, choking off the supply of credit to households and small businesses.

On Tuesday the report drew a stinging rebuke from Maxine Waters, the ranking Democrat on the House Financial Services Committee, who described it as hiding “harmful intentions behind generalities and platitudes”.

“There is nothing nice, reasonable, or thoughtful about this proposal,” she said. “The Trump administration is saying loud and clear that they would rather gamble with our financial security than prevent Wall Street from taking advantage of hardworking families.”

Among the report’s recommendations: changing the frequency and the severity of the stress-testing process, scrapping the “gold-plating” of global capital and liquidity standards for the biggest US banks, and a looser interpretation of the Volcker ban on banks making speculative bets with their own capital. All three are possible via supervision and enforcement, rather than legislation.

The report was also critical of international standard-setting bodies such the Basel Committee on Banking Supervision and the Financial Stability Board, noting “overlapping objectives” and a general lack of transparency in their deliberations. It said, for example, that the Basel Committee was “limiting the potential for the public to meaningfully influence” its processes by taking in outside comments too late in the rulemaking process.

Back home, Mr Mnuchin’s team took aim at the Consumer Financial Protection Bureau, a six-year-old agency spawned by Dodd-Frank, Barack Obama’s landmark post-crisis reform act. The report recommends changing the law to make the bureau’s lone director removable at will by the president, restructuring the bureau as a commission, and submitting it to the annual congressional budget process.

The Treasury department also raises the possibility that banks should be able to opt out of all capital and liquidity requirements and “nearly all” Dodd-Frank requirements, including the Volcker rule, in return for maintaining substantially higher capital levels. That is similar to the “off ramp” envisioned in the Financial Choice Act, which was passed last week by the House of Representatives but is unlikely to make much headway in its current form in the Senate.

Ian Katz, an analyst at Capital Alpha Partners in Washington, cautioned that the measures pushed by Mr Mnuchin will take time, and there will be “failures” along the way. “Keep in mind, this really is a wish list in that Treasury isn’t a rule-writing regulator. While it can use the bully pulpit to express its will, neither lawmakers nor regulators have to listen,” he said.

Mr Mnuchin, a former Goldman partner who drew up the report with the assistance of his counsellor Craig Phillips, formerly of BlackRock, stressed that he was focusing on measures that could be implemented without delay at agencies, but that he looked forward to “working on a parallel track” with Congress.

Monday’s report is one of several the Treasury will release in the coming months, addressing Mr Trump’s call for lighter regulation.

Sally Miller, chief executive of the Institute of International Bankers, said the recommendations represented a “thoughtful, well-reasoned, common sense approach to mitigating some of the unintended adverse consequences of post-crisis financial regulation”.